Free Trade Is a Good Thing

by Pejman Yousefzadeh on May 4, 2011

It’s amazing that fact needs to be pointed out, instead of being readily accepted as true and unarguable. Unfortunately, protectionists are as eager today as they ever have been to obscure the truth, so it falls to people like Ronald Bailey to make the case anew for free trade:

The headline ["No Nation Was Ever Ruined By Trade"--ed.] is a quotation from Benjamin Franklin, who added, “Even seemingly the most disadvantageous.” Franklin believed that free trade was good for everybody. In the 21st century lots of Americans and their politicians believe the opposite: Being open to trade allows rapacious corporations to “ship jobs overseas.”

In the 2010 mid-term elections, the Democratic National Committee rolled out a television ad campaign accusing various Republican candidates of favoring policies that shipped jobs overseas. More recently, Senate Majority Leader Harry Reid (D-Nev.) declared, “I think we should do a lot more to stop shipping jobs overseas.” In the meantime, the Doha Round of international trade negotiations has been on the brink of collapse for a while, sparking fears the freer trade system painstakingly built over the last 50 years might begin to unravel.

A new study, Trade and Unemployment: What Do the Data Say?, by three European economists published in the journal, European Economic Review in March, forthrightly asks the question: Does exposure to international trade create or destroy jobs? Their answer strongly backs the observation made by Franklin more than 230 years ago. “A 10 percent increase in total trade openness reduces aggregate unemployment by about three quarters of one percentage point,” they conclude. To be a bit more precise, they find, “A 10 percentage point increase lowers the equilibrium rate of unemployment by about 0.76 percentage points.” Trade creates jobs.

In general, the higher a country’s volume of international trade, the higher is its degree of openness. Trade openness is generally measured by adding together the value of both exports and imports and dividing that sum by total gross domestic product (GDP). Crudely, let’s say an economy imports $10 billion annually and exports $10 billion annually and has a total GDP of $100 billion. That would yield a trade openness index figure of 20 percent. Another country with a GDP of $100 billion exports $15 billion and imports $15 billion, yielding a trade openness index of 30 percent.

[. . .]

So why do people, especially politicians, believe the opposite? The 19th century French economist Frederic Bastiat explained this sort of disheartening policy myopia his brilliant essay, “What is Seen and What is Not Seen.” People tend to focus on the seen consequences of a policy, in this case, competition from trade eliminating some jobs at relatively inefficient companies.

But they miss the unseen benefits, such as new jobs that result from increased average productivity. Naturally, the people who lose their jobs are worried and angry, so they call their member of Congress to complain about “unfair” trade. Fearing that they may lose their jobs, the denizens of Capitol Hill seek to enact legislation to block imports or mandate “Buy American” to protect their complaining constituents against “unfair” trade. In politics, as in much of life, the squeaky wheels get oiled.

We currently have, at best, a half-hearted commitment to free trade. Meanwhile, unemployment remains a persistent problem. It’s high time we realize that at least in the long run, those two facts are related. Perhaps even in the short and medium run as well.